Should You Opt for Moratorium 2.0? Know the Cost of 6 Free EMI Months

Should You Opt for Moratorium 2.0? Know the Cost of 6 Free EMI Months

Covid 19 has severely disrupted financial activities all across the globe, let alone India. In face of double whammy of financial and medical emergency in the country, the Governor of Reserve Bank of India has announced RBI’s grant to banks & financial institutions for extending EMI moratorium for another 3 months (till August 31, 2020) to facilitate some liquidity relief to borrowers.

Already all major public banks, private banks, & NBFCs have acknowledged Moratorium relief for three months-March, April & May 2020 to their customer. With effect of today’s announcement, the India’s COVID 19 Moratorium Package becomes a 6 month repayment deferment plan.

If you decide to opt for Moratorium, your next term loan EMI or Card Statement will be due in September 2020.

Amid nationwide lockdown, when your income has already been affected harshly the loan holiday of 6 months appears to be a great relief from your lender.

However, it is worth pondering, whether the deferment of EMIs, will ease your liquidity crunch at all? And what is the cost of this loan holiday?

It is important to understand that your bank is not doing a charity by not allowing you to repay the loan you owe. There is a cost attached for deferring the payments. 

So, let’s simplify the mathematics involved:

What exactly is your bank offering?

Your bank is offering cash flow liquidity as elucidated in the table below. The benefits of Moratorium are precisely two: A) You have more cash in hand by skipping fixed bank obligations and B) There will be no impact on your credit rating by missing the payments for a few months.

.

What all will Moratorium include?

Cash flow relief

Not a waiver

Interest will accrue

Overall principal & interest cost will increase

No late payment fee

No impact on your credit score

Now as Moratorium is extended till August 31, 2020 you can defer repayment of principal & interest for this period. Keep these points in mind:

  1. Moratorium is a cash flow relief. Not an interest waiver.
  2. As you avail of repayment break, the interest will continue to accrue at the contracted rate.
  3. Your overall loan liability will go up after the expiry of Moratorium.
  4.  The loan tenor will be adjusted accordingly.
  5. There will be no late payment charge or Credit rating impact if you opt for moratorium.

What will be the actual cost of Moratorium? How will it impact your pocket?

Let’s take an example to understand the cost of Moratorium.

CASE 1: If you have not availed Moratorium before and have now decided to apply for 3 month Moratorium.

Impact of Moratorium on Home Loan

In the table below we have assessed interest variability in case of a Home Loan at different residual tenures. We assume ROI is 8% pm and EMI is Rs 50000.

Residual Loan Term Moratorium New Total for EMIs Additional EMI

60 (5 years)

3

65

2

120 (10 years)

3

127

4

180 (15 years)

3

191

8

240 (20 years)

3

256

13

You can use MyMoneyMantra EMI Moratorium Calculator to evaluate exact impact of repayment deferment on your loan.

As we saw above, a lot depends on the age of loan. The same rule will apply to your Car Loan or Personal Loan.

In case of Home Loan, what we also noticed: New loans have a much larger component of interest payment in EMIs. Progressively it reduces as the loan is paid off. So, impact of interest accumulation would be highest in the new Home loans.

Impact of Moratorium on Personal Loan/ Car Loan

Likewise, here is an example for Personal/ Car Loan in different stages:

Residual Loan Term Moratorium New Total for EMIs Additional EMI

12(1 year)

3

16

1

36 (3years)

3

41

2

60 (5years)

3

66

3

So, it is important to answer, if you are willing to pay 6 more EMIs for resting your loan for 3 months?

Use 6 months EMI Moratorium Calculator to assess the exact impact of Moratorium on your Loan tenure.

Impact of Moratorium on CREDIT CARD

Before you opt for a Moratorium on your Credit Card, make note of this checklist.

  1. Your credit card comes with a very high rate of interest, usually @ 2.5-3.5 % pm + GST. You can check your bank/credit card company’s website to check MITC document to check the rate of interest on your card.
  2. Your card’s limit is temporarily blocked basis your card balance. Thus if you do not pay out bill you cannot advance beyond the limit.
  3. In case you use the card up to the approved limit, you lose the free credit period. The interest will be calculated on all new transactions from Day 1.
  4. You would be required to repay the consolidated card statement due after Aug 31.

Thus, opting for a Moratorium on your Credit Card can indeed be a very costly affair.

MyMoneyMantra recommends: Go for EMI/repayment moratorium only in case you’re facing extreme cash crunch or facing financial emergency such as loss of job/income source.

Reset or pause some of your expenses, and try to continue making payments as much as possible.

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